Crude Demand Rising

Crude prices plunged nearly $2.50 on the inventory report but rebounded after noon to close at the high for the day.

The obvious reasons for the rebound were the increasing instability in Syria and expectations for a new QE program from the ECB and/or the Fed. The Syria problem boils down to what happens if the government falls and some third party gains control of the chemical and biological weapons Syria stockpiled. The government has already moved them more than once to a "safer" location or at least that is the claim. It is hard to steal them or capture them if you don't know where they are. Syria's military leaders may have thought it best to provide some misdirection to keep everyone guessing.

Israel is afraid Syria or Iran will allow them to be taken by Hezbollah. Russia is afraid they will be captured by the rebels from Chechnya. The U.S. is afraid they will fall into the hands of al-Qaeda. The U.S. would love to capture the weapons so they can determine if they are the missing WMDs from the Saddam regime in Iraq. There was always a strong belief that Saddam moved them to Syria for safekeeping when the weapons inspectors were doing surprise inspections in Iraq before the war. With the situation changing daily in Syria there are a number of potential outcomes from the civil war and that is pushing the entire region into a state of heightened concern.

The growing instability in Syria is also creating concern that the sectarian warfare could spread to other oil producing countries.

The ugly economics from Europe seem to get worse every day. Germany and Britain both posted economic stats this week that were two year lows. They completely overshadowed some good news out of China with a stronger than expected PMI.

The problems in Europe are expected to force the ECB to launch another round of QE in order to lower treasury yields in the eurozone. Comments today about giving the ESM a banking license helped to push the euro higher and dollar lower. Making the ESM a bank would allow it to leverage its cash on hand and make loans not otherwise possible under the current ESM rules.

On Tuesday the WSJ ran an article suggesting the Fed could announce new monetary policy consisting of QE or something new as early as next week. The article was just an opinion piece but it managed to lift the equity markets off their lows on Tuesday and the sentiment carried over to Wednesday with the Dow and commodities moving higher. The half point drop in the dollar index on QE expectations provided support for commodities.

Intraday WTI Chart

I was very surprised to see crude prices rebound from the early inventory related losses. The EIA reported that crude inventories rose +2.7 million barrels to 380.1 million. This was contrary to the expected -250,000 barrel decline. The reason for the strong gain was a +690,000 bpd increase in imports to a two month high of 9.63 mbpd. That 690K per day increase works out to 4.83 million barrels of extra oil for the week. That is a lot of surplus crude and I am surprised the EIA inventory number was not higher.

Inventory Snapshot

U. S. production also increased to 6.36 mbpd and that is also a two month high. Gasoline demand was almost flat but diesel demand did increase +140,000 bpd.

Crude demand as referenced by refinery inputs rose to 15.796 mbpd and the highest demand since Sept 22nd 2006.

Refinery utilization rose to 93.0% and that was the reason for the build in gasoline and distillate inventories. That is the highest utilization so far this year.

Crude oil inventories are still well above the five-year average range but gasoline is finally starting to move back into a normal range. Distillates are also still outside the range but headed in the right direction.

Crude Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

Gasoline and diesel prices rose for the third consecutive week and that is probably a reason for the increase in refinery utilization. The refiners are still benefitting from the drop in oil prices in late June and the oil they are refining now would reflect those prices in the cost of raw materials. This means refiners should be profitable for Q3 assuming oil prices don't spike much higher over the next month.

There are still no storms on the horizon in what has been a very slow storm season to date. The weather patterns have gone dormant with monster high pressure areas preventing the formation of the normal storm patterns. Instead of storms we have heat waves and droughts on a global scale. The average temperatures in the Midwest are expected to be 12 degrees over average for the next three weeks. That will be a huge impact on crops. Ethanol production is expected to slow if the drought continues.

In earnings news Hess (HES) reported earnings of $1.61 per share that beat the street estimates of $1.38 thanks to a strong increase in production from 372,000 bpd to 429,000 bpd. Hess doubled production in the Bakken from last year's levels. Their refining operation also contributed $8 million in profits compared to a $39 million loss in the year ago quarter. Shares rallied +3.5% on the news.

Conoco Phillips (COP) was not as lucky as Hess. COP posted profits that declined -33% due to asset sales and declined in oil and gas prices. Conoco earned $1.22 per share ($2.27 billion) compared to estimates of $1.20. Conoco said it would spend $16 billion this year on capital expenditures and that was higher than most analysts expected. The CEO said Conoco needed to continue its rapid development schedule even though prices are temporarily lower. The company has sold over $20 billion in assets over the last couple years to raise money for capex and trim noncore assets. Production declined by -6% due to asset sales. Shares declined -2.5% on the news.

Whiting Petroleum (WLL) reported earnings of 73 cents compared to estimates of 79 cents. The miss was a result of lower received prices for oil and gas. Oil prices received declined -16%. However, the company increased production by 26% for the quarter and raised full year estimates to 30.1 million barrels. Shares were flat after the report.

I am encouraged about the bounce in crude prices today but I do not expect them to move much higher unless the situation worsens in Syria or the Fed/ECB actually announces some QE program. We should be in a holding pattern until Europe works through its problems OR China catches fire again.